'Crises are bound to happen again and again'

opinion August 08, 2014 01:00

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Governor of Malaysia's central bank Zeti Akhtar Aziz shares her insights from the front line of the battle against regional and global financial crisis, in an exclusive interview with the Nation Group's Veenarat Laohapakakul

Dr Zeti Akhtar Aziz is the first female central bank governor in Asia. She has been with Malaysia’s central bank since 1985, becoming interim governor during the financial crisis in 1998 and governor in 2000. She has been credited with developing the financial sector and steering Malaysia onto a stable economic path.

A lot has been said about the Asean Economic Community, but how will integration in next year actually impact our 10 economies?

I am a strong advocate for this integration process because I think our approach is very different to the way Europe has approached economic and financial integration, though we would like to achieve the same objectives of greater prosperity for all the countries. We come from a region of highly diverse countries and so we can leverage on our complementary strengths. Going forward we really need to intensify our interconnectivities so that there’s more trade. Right now, [only] 25 per cent of our total trade is within Southeast Asia, so we need to intensify this. We need to recycle our savings so they are invested within our region. We should put in place the infrastructure to enable this to happen.

This should be win-win. No countries should be marginalised as a result of this process. It cannot be a winner-takes-all approach.

The BRICS countries recently formed a development bank. Do you think that’s a good idea?

To some extent I think it’s an expression of frustration that emerging economies do not have a voice in existing international organisations like the IMF and World Bank. There are tremendous challenges in restructuring the quota system to get greater representation. We are becoming more dominant. The world becomes more multipolar. There’s increasing significance of emerging markets in contributing to global growth, so we want to have a greater choice and be part of the international decision-making process. When that is not happening, this is what happens. International organisations, like the World Bank and IMF, should leverage on these organisations and work collaboratively rather than looking at it as a threat.

Bankers cause financial crisis. Do you agree?

(Smiling) Well, not necessarily. In some cases, it was because part of a financial system, especially in the US, was not actually regulated – investment banking, and so on. The environment has also changed significantly that the crisis starts in the financial market and it can be addressed at that point in time to manage the stresses and dysfunctionalities that occurred in the financial market because from the financial market it translates into massive losses to the financial institutions, then you have financial stress and economic crisis that follows.

I don’t think you can put the blame on anyone in particular because equally important is the regulator that provides the oversight. We should see the oncoming nature of the developments that are taking place. I believe in intervention. We have a very interventionist supervisory oversight. The central bank of Malaysia doesn’t believe in the light touch approach because sometimes the market gets over exuberance and this need to be contained. It’s very difficult to take away the punch bowl when the party is going, but it’s the role of the regulator to tamper these kinds of trends. It’s not very popular but the price for it later on is much, much higher. It’s very damaging and can be very devastating to a country.

What do you think the relationship between the central bank and its government should be?

That is always a challenging relationship. It has to be a continuous relationship of engagement. The central bank wants to have its independence and that is very important. It is in the interest of the government to have an independent central bank because the central bank will be at the forefront of any crises and crisis is all about managing confidence. When you lose confidence, it can be very highly destabilising, far more destabilising than the factor that triggers the crisis. So having an independent central bank that had a high degree of credibility is very important.

What is important is the central bank had to keep the government informed of what it is doing because most governments do not like surprises and neither do markets. This relationship has to be managed well. Differences exist because there’s lack of awareness and understanding of the issues. The issues going forward have become far more complex. The central bank can never on its own manage a financial crisis, but has to manage it collectively, not only with Finance Ministry but with other ministries and agencies.

Does the Malaysian government ever tell you what or what not to do?

No. There’s a degree of respect. There are differences in views on how certain matters are to be addressed, but these differences are resolved bilaterally, not done over the media or in the market. This is the constructive way to do it.

Was the financial crisis back in 1998 the most difficult time for you as a central banker?

Reflecting now, the most challenging time for me was probably the financial crisis. The reason is that in such an environment, if the wrong decision was made or there was inaction, the cost of it would be so high and would be high for all people living in the country. The cost would be devastating. The stakes are very high.

The second reason why it was so challenging is that the central bank, which is at the forefront of any financial crises, you cannot resolve the crisis on your own. You have to rely on others that have very important roles and therefore it is the collective effort, but any form of collaboration when there’s very diverse views and interests, it’s highly challenging. When the crisis reached its peak, it was a moment in history where it could go one way or the other. That was the most challenging time that I’ve experienced.

Is there any chance we will ever see a financial crisis like 1997-1998’s again?

Well, that is unpredictable. Recently I gave a paper on “Managing financial crisis in an interconnected world” and the subheading was “Anticipating the next mega tidal wave”. This is because crises are bound to happen again and again. Over the recent 30 years, there’ve been more than a hundred crises around the world. Some have greater spillover effects than others. Therefore, what is important is we have the capability in managing such crisis. If we are best able to manage such crisis, we can minimise its impact on us, whether it’s generated within our own financial system, or it’s a spillover effect from another part of the world.

This capability has to be in-built. Most central banks have business continuity teams that can manage disruptions but we also need a crisis management team that can coordinate any eventualities of a crisis. I do believe that’s the way forward. I do not think we can prevent crisis from happening.